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These Emerging Sectors Could Buck The Receding Wave Of Startup Funding

New and emerging sectors including health, climate and energy are top VC picks in an otherwise drab environment.

<div class="paragraphs"><p>Divis bridge in Visakhapatnam, Andhra Pradesh. (Photo: BQ Prime)</p></div>
Divis bridge in Visakhapatnam, Andhra Pradesh. (Photo: BQ Prime)

With global markets turning volatile and central banks less accommodative, venture capital funding for startups has turned less abundant, threatening job creation. Still, new and emerging sectors, including health, climate and energy, could continue to get VC in an otherwise tough environment.

Venture capital investments in startups rose to $15 billion between January and May 20, 2022—32.7% higher than funding between January and May last year, according to data shared by the Indian Venture and Alternate Capital Association. However, a month by month break up shows that funding is sliding. It fell to $2.9 billion in April 2022, and to $1.3 billion up to May 20.

With the war, rate hikes by the U.S. Federal Reserve and even India's central bank, liquidity is going down and high net worth and angel investors will think before investing, as money is illiquid and it is locked in for longer, Padmaja Ruparal, co-founder at the Indian Angel Network and founding partner at the IAN Fund, said.

As such, startups will become more conservative, with technology development and expansion plans on the back foot, according to Ruparel. "Companies will downsize on talent, high attrition will fall and obnoxious salary demands will come down. This is just the beginning."

If companies are aggressively hiring, have launched plans and are suddenly hit by an economic downturn and demand has become sluggish, they will have to scale back on hiring plans, Anup Jain, managing partner at Orios Venture Partners, said. It is different from sector to sector, Jain said, adding that the message is to conserve cash. "Do not be aggressive on plans and hiring in the future", he said, advising startups to wait out the current slowdown.

Rema Subramanian, a member of the executive committee at IVCA and co-founder and managing partner at Ankur Capital, said the current round of layoffs at startups are because of mismatches between startups' fundamentals, cash burned and future funding prospects.

A return to normalcy post the pandemic has also shifted consumer behavior, she said. For instance, schools have reopened and ed-tech is now a supplement for students rather than a substitute. "Employment generation is likely to normalise compared to a J-curve shape earlier," she said.

While global headwinds in early 2022 are likely to affect the funding outlook for the rest of the year, a few new sectors such as crypto and blockchain-based technologies, healthtech and agritech, will probably see emergent growth, according to the India Venture Capital Report 2022 by Bain & Company.

Consumer technology, fintech, and software as a service have continued to account for 75%+ of all VC investments by value, according to the report.

Go Where The Money Will Be: Health, Climate, Energy

Sectors such as healthtech, biotech, climate, and sustainable agriculture, among others, continue to draw interest, and are attracting investors globally and in India, according to Subramanian.

Ruparel also said healthcare, biocare and clean energy are focus areas. After all, the current generation is less focused on building assets and more focused on building a life, she said.

Investments in crypto will depend on how policy shapes up, said Subramanian. However, core product roles in tech are likely to continue to attract attention, she said. Sectors such as BNPL will see some cooling off.

Business problems remain, Jain said. Tools to empower small businesses are great areas to invest in. Osborne Saldanha, principal at Emphasis Ventures, also said VC funding in India will go to founders focused on building structurally sound businesses with an eye on business metrics of users, retention, revenue and costs. Valuation, though, could be less important and deal timelines may be longer.

Saldanha continues to remain bullish on fintech.

Nothing changes for me and I will continue to invest in the best founders starting up. Honestly, I couldn't be more excited to back founders starting up in fintech.
Osborne Saldanha, Principal, Emphasis Ventures

Some of the world's largest tech businesses today—Slack, Uber, Facebook, Amazon, LinkedIn and more—were born out of periods of recession or changing market sentiment, Saldanha said in his newsletter published on May 9, 2022. This is potentially the best time to start up, he said.

(Corrects an earlier version that misstated Osborne Saldanha’s designation.)